Damage limitation: farm trust structures

The reality is that every case will be decided on its individual facts, but a recently reported case sheds light on how the courts view these things.

In RK v RK [2011] EWHC 3910 (Fam) there was a family company (‘FC’) which owned a large estate. When the parties met, the husband was working in FC as an assistant estate manager, but he rose to become a director of FC. However, he did not own any shares in FC. The principal activity of FC was farming, but it also owned a number of other assets, principally properties.

The estate had been founded by the husband’s great grandfather about 100 years previously and had been passed down the generations.

Sharing out

At the time of the hearing, the shares in FC were owned as to 29 per cent by the husband’s father, 42 per cent by his uncle, about 13 per cent by an aunt and just over 15 per cent by eight family trusts. The first of these trusts had been set up by the husband’s grandfather in 1965. The remaining trusts had been constituted in the intervening period by the husband’s grandfather and parents.

The beneficiaries were children and remoter issue of the settlers and, in most cases, their spouses. An indication of the value involved is that the shares held by the trusts had a combined gross value of about £12.8m.

The parties married in 2001 and separated in 2009. They had three children. At the time of the divorce the wife was 40 and the husband 39. The problem was that they had no assets to speak of but horrendous debts - the husband had net liabilities of just over £300,000 and the wife had debts totalling £245,000.

Against this background the wife sought a capital fund of £425,000, £400,000 being for the cost of a house and £25,000 being to fund the costs of purchase of the house and a car.

She accepted that the £400,000 could be provided in such a way that she had a life interest in that sum, i.e. she was not looking to receive the money outright. She also wanted £245,000 to cover her debts, including her legal fees, an equal share of the husband’s pension fund and maintenance for herself and the children at the rate of £30,000 per year.

Finally, she also made a claim in respect of the family dogs. The judge who heard the case did not consider it appropriate to make an order on that issue because he found that, on the evidence, they had principally been looked after by the husband...

Meeting needs

The judge described the key issue as being: “the extent to which the trustees... are likely to provide resources to or for the wife direct and/or to the husband to enable him to meet the wife’s financial claim.”

The trustees had been prepared to offer assistance up to a figure of £400,000 in total; £375,000 for a house, £15,000 for furniture and white goods and £10,000 for a car. Accordingly, ignoring for the moment that the wife would be left with a huge costs bill, the parties were not a great distance apart.

In the end the judge decided that it was reasonable for the wife to spend £400,000 on a house, excluding associated costs. Indeed, he determined that, because the house would remain within the trust structure, the trustees could increase the capital fund to provide from £400,000 to £425,000.

He also concluded that the trustees could provide a further sum of £50,000 to the wife directly or to the husband for the wife to reduce her debts. This would still leave the wife with horrendous debts and it is unclear how the judge thought they would be dealt with.

Having carried out his assessment, the judge decided not to make an order but instead directed that a transcript of his judgment be sent to the trustees for their views in the expectation that they would agree to make the financial provision he had suggested. This is an example of the court using ‘judicious encouragement’ to a third party to act in a particular way.

The judge examined the development of this concept since 1995, particularly in the area of trusts and the importance of ‘encouragement’ not developing into ‘improper pressure’.

This will be a question of balance to be struck in every case, but the judge was satisfied that the court will expect trustees to respond positively if the court concludes that the interests of the trust and of the other beneficiaries will not be appreciably damaged if the trustees were to provide the husband with the resources required to enable him to make proper provision for his wife and children. The trustees will be expected to respond positively because the court will have concluded that the trustees would, in the exercise of their duties, respond in a reasonable manner to a reasonable request from the husband.

As had been said by the Royal Court of Jersey in 2004: “In our judgment, where the requests made of trustees are reasonable in the context of all the circumstances, it would be the exception rather than the rule for trustees to refuse such requests.”

The trustees may not be bound to comply with a request from a husband to come to his aid but it is plainly proper for trustees to take account of such a request.

Structured response

This is not a ‘groundbreaking’ decision but it provides a useful reminder of how the court approaches family trusts within the context of a divorce. In answer to the question posed at the outset, the structure created by the husband’s family may well have limited the damage done by the wife’s claim - the largest component of her claim, being a suitable home, was to be provided in such a way that the money did not pass outright to the wife.

It is also perhaps noteworthy that the judge was somewhat critical of the husband for not approaching the trustees and seeking to persuade them to make appropriate provision to enable the compromise of the wife’s claims.

The suggestion is that, when trustees become aware of a divorce involving one of their beneficiaries, they should perhaps become more engaged in trying to assist the beneficiary to achieve a resolution. In this case, the wife put her costs of the financial proceedings at £195,000 and the husband’s costs were £130,000. The trustees themselves had incurred legal costs in excess of £46,000.

These figures demonstrate how a large proportion of a family’s wealth can disappear into the pockets of lawyers when financial claims remain unresolved and proceed to a court trial.

For the full judgment see https://www.familylawweek.co.uk/site.aspx?i=ed99040